"Inter-firm Bundling and Vertical Product Differentiation"

04-02-2011

Duarte Brito & Helder Vasconcelos

This paper studies the competitive effects of bundled discounts when each component good is sold by a different single-product firm. In a setting with vertically differentiated goods and firms deciding simultaneously about their participation in a discounting scheme, it is shown that, in equilibrium, all firms offer bundled discounts and, relative to the no-bundling benchmark: (i) all headline prices rise; (ii) all bundle prices, net of the discount, rise; and (iii) all firms earn higher profits. Furthermore, the equilibrium corresponds to the worst scenario in terms of consumer and social welfare, when compared to bundled discounts only offered by a single pair of firms or to the no-bundling benchmark.